Holding your business premises in your pensions

Many business owners see rent as lost money and would prefer to own their premises rather than lease it from a third party.

Using the benefits built up within your pension to purchase your business premises could be a potential solution.

Can I use my pension to buy a business property?

Self-Invested Personal Pensions (SIPP) and Small Self-Administered Schemes (SSAS) offer the ability to invest directly in UK Commercial Property. As a business owner or if you are self-employed, this flexibility may be particularly beneficial as your pension can hold the property from which you run your business.

Most SIPP and SSAS providers permit the purchase of commercial property, such as offices, retail units and factories. You can generally not invest in residential property like houses, flats, holiday homes and holiday lets.

What if your property has both commercial and residential status?

Many properties can consist of both – such as a shop with a residential flat above. There are special rules for this and, whilst more complex, it may still be possible to purchase such a property.

The property can be leasehold, freehold or commonhold, although it may be difficult to arrange a mortgage on a short-term leasehold.

It is always worth exploring this option before fully discounting such an opportunity.

What are the benefits of holding your business premises in a pension?

There are a number of significant benefits for both you and your business. 

Tax benefits within the pension

1. Income tax is not payable on rent received 
2. Capital gains tax is not payable on any increase in value if the property is sold
3. It is outside your estate for inheritance tax purposes
4. As rent accumulates, it is available for investment into other non-property assets

Benefits for your business

1. Rent from the business is paid into your own pension plan rather than to a third party
2. Rent is treated as a company expense so reduces corporation tax payable (or income tax in the case of the self-employed/partnerships)
3. If the business fails, the property will be protected from creditors
4. It retains control as it stops the possibility of a third party landlord either:

• Increasing rent above the market rate,
• Selling the property; and/or 
• You being forced to move premises

How can I fund the purchase?

The purchase cost is typically met using the existing value built up within your pension. There are a number of different options available to help towards the purchase:

1. Consolidate your pensions – most people have built up pension savings in a number of pots over the years. It may be possible to transfer and consolidate these into one single pot.
2. Make further pension contributions – if you have cash available, either within the business or personally, further pension contributions can be made which would also benefit from tax relief within allowable limits. The net cost of the property after tax relief, to you or your business, could therefore be considerably less than the amount actually contributed.
3. Borrow money – a key benefit of a SIPP or a SSAS is that you can borrow up to 50% of the value of your pension less any existing borrowing. This can only be secured against the property being purchased or any existing pension assets. This means that if your SIPP or SSAS was worth £200,000 and assuming no existing borrowing, you could borrow up to £100,000 and have a total of £300,000 to go towards the purchase cost. 

Can I purchase a property with somebody else?

Yes – and with the current limits that you can pay into a pension each year, this is becoming increasingly common. 

You can purchase the property jointly along with several people’s pension schemes – for example with your spouse or business partners’ pensions - as well as with you as an individual, your business, or almost any other third party.

Importantly, the joint owners do not have to hold equal proportions of the property.

How much will it all cost?

Costs are always an important consideration and these can generally be split into two parts – initial and ongoing. 

Initial costs

There are a number of initial costs that can be incurred and these vary depending on the complexity of the transaction. These are likely to include:

• VAT
• Solicitor’s costs including search fees and land registry fees
• Valuation fee
• Mortgage arrangement fees (if applicable)
• Fees for set up of the pension and management of the property purchase
• Financial planning fees
• Stamp Duty Land Tax (SDLT) is payable if the purchase value is more than £150,000.

If you are purchasing a leasehold property you pay SDLT on both the: 

• Purchase price of the lease (the ‘lease premium’) using the rates above
• The value of the annual rent you pay

These are calculated separately and added together. A calculator is available on the HMRC website to assist in these calculations.

Ongoing costs

Annual costs and management fees will also be payable.

These generally cover items such as rent invoices, rent reviews, renewing leases, annual insurance cover and the repayment of any borrowing. 

Some pension providers may allow you to manage the property yourself which can help to keep ongoing costs down.

What about VAT?

VAT rules are very complicated so it is important to get it right. Your pension can register for VAT where the property is (or will be) subject to VAT. This allows the pension to reclaim the VAT paid on the purchase and/or any development of the property.

If the property is subject to VAT with an existing lease in place that will continue after the purchase, it may be possible to treat the purchase as a Transfer of an Ongoing Concern (TOGC).

In doing so, no VAT is chargeable on the sale and no reclaim of VAT is necessary. This can be beneficial as it means that less capital is required up front to meet the purchase costs.

What are the potential disadvantages of holding business property within a pension?

Whilst there are significant advantages there are also a number of potential disadvantages that must be taken into account:

• Charges for a SIPP or SSAS will be relatively high when compared to a standard personal pension plan.
• Direct investment in property is illiquid, meaning that it can take time to sell particularly at a price you are willing to accept. It is important to think ahead. If commercial property is the only pension asset how will you create liquidity to pay tax free cash or an income at retirement?
• Holding a significant proportion of your pension in one asset increases the investment risk due to the lack of diversification. What effect would a downturn in commercial property have on your retirement? We would encourage you to spread this risk by holding other assets alongside the property for example cash, bonds, shares and alternative investments.
• A formal lease must be arranged on commercial terms. In other words, you can’t give your business a better deal than would otherwise be available in the open market.
• If the business previously owned the property outright beforehand, no rent would have been due. Commercial rent to the pension would be a cost increase to the business and would have to be affordable and taken into account.
• If the business fails and you can’t find another tenant, there would be no income but you would still have ongoing costs to pay. 

How we can help?

Buying a commercial property can be a complex task, but we can help make the process as straightforward as possible.

With a wealth of experience, we can help you decide whether buying your business premises with your pension is right for you and your personal circumstances. 

If you would like to discuss this in further detail please contact one of our advisers.